23 Oct 2012

iPad Mini Pricing & Segmentation

After months of speculation, Apple finally unveiled their worst kept secret, the 7.9" iPad Mini. Apple will launch their answer to the Nexus 7 at a starting price of $329 for the 16GB WiFi model (our price estimate was pretty close, although 8GB storage assumption was off). Apple also announced a 4th generation iPad with an upgraded A6X processor, to replace the existing 3rd generation model.
Let me start by talking about my first impressions from the launch. I was surprised that Apple decided to price the iPad Mini above the psychological $300 barrier. My guess is that Apple wanted its margins to stay above a certain level (my BOM estimate pegs the gross margin for the entry level at about 40%). The biggest surprise was the launch of a 4th generation iPad just 6 months after the 3rd generation model. This seems like a very clear attempt to minimize cannibalization of iPad sales by the cheaper iPad Mini.

While I still need more inputs for an accurate sales estimate, I'm currently working on a cannibalization estimate for the iPad Mini. Meanwhile, let's take a look at the impact of Apple's pricing decision on the iPad Mini's target segments. This could also help narrow down the segments that are more prone to cannibalization.

First-time Tablet Buyers

First time tablet buyers make up the lion's share of the potential market for smaller tablets. This market can essentially be divided into two (slightly overlapping) segments, price sensitive buyers and brand conscious buyers.

Price Sensitive Buyers

Globally, this is the largest potential market for a smaller tablet. This represents the single largest, long-term growth opportunity for the tablet industry. However, at a starting price of $329 for the 16GB version, the iPad Mini is unlikely to make much headway against the Kindle Fire ($199 for 16GB, $159 for 8GB) and the Nexus 7 ($199 for 8/16GB, $249 for 16/32GB). Given the price/storage options, even more value conscious buyers could be swayed away from the iPad Mini.

Even with the iPhone, this has never been a strong market for Apple. On the other hand, Android smartphones have made considerable headway in this segment and Android tablets are likely to follow. The iPad Mini could still pick up a decent chunk of this segment in developed markets (especially the US) because of lower consumer awareness about competing products.

In terms of the sales mix, this segment is unlikely to look beyond the entry level version.

Brand Conscious Buyers

This is probably the second largest consumer segment out there after price sensitive tablet buyers. This segment is likely to include the education sector, which the iPad Mini is squarely targeted at. While the education sector holds great, long-term market potential for the iPad Mini, it is just a small portion of this segment.

This segment has traditionally been Apple's bread and butter. The iPad is the strongest brand in the tablet market by far and any brand conscious buyer looking for a smaller tablet is likely to opt for the iPad Mini. These consumers are likely to have opted for the larger iPad (as they would most likely pick the bigger brand regardless of their form factor preference), in the absence of the iPad Mini. This creates a very real cannibalization threat for Apple, and undoubtedly spurred the early launch of the 4th generation iPad. Also, this segment is likely to be more concentrated in developed markets as opposed to emerging markets, which means long-term growth potential could be lower.

The sales mix among this segment could be diversified, but is likely to trend towards lower storage options.

Existing Tablet Owners

Global tablet penetration is still very low and mainly concentrated in the US and emerging markets. This means the the potential market for the iPad Mini among existing tablet owners should be very limited. This market is primarily divided into the following segments:

Secondary Tablet Buyers

These consumers already own a tablet (most likely an iPad or 10-inch device) and could look to augment this with a smaller, more portable device. These buyers are unlikely to opt for higher storage options, but could opt for 4G connectivity.

Replacement Tablet Buyers

These consumers are likely to be very early adopters and could look to replace an older tablet with an iPad Mini. Cannibalization here could be very high as well, but the impact could be muted as the customer base is likely to be relatively small. The sales mix could be diversified across storage and connectivity options.